The banking boom was as bad as the banking bust

No more boom and bust, as Gordon Brown once said – issuing what may prove to be the most expensive broken promise in British history.

But why, apart from hubris, self-delusion and an ear for the alliterative potential of a soundbite, did he promise no more ‘boom’ as well as no more ‘bust’? After all, the boom was good while it lasted, right?

Well, no, it most certainly wasn’t. That, at least, is the argument made in a speech by Andrew Haldane, a big cheese at the Bank of England. It wasn’t just the credit crunch that hurt the British economy, he says, it was also what happened before – when there was still a huge amount of money to be made from pumping debt into the system:

“With returns sky-high, there was then a great sucking sound as both people and monies were drawn into banking, in particular the high-risk/high return, sharp-suited parts such as investment banking. A generation of scientists’ and mathematicians’ heads were turned towards finance. Funds flowed into the bank money-machine, with balance sheets rising fivefold in less than 20 years, much of it to support short-term trading activities rather than long-term investment…

“The costs of this great sucking sound are only now being properly understood. Recent research by the Bank for International Settlements suggests that, once bank assets exceed annual GDP in size, they begin to act as a drag on growth.”

Haldane describes a “financial vacuum-cleaner” that sucked the life out of genuinely productive enterprises:

“The sectors hardest-hit… are R&D-intensive businesses (who might otherwise have attracted the scarce, skilled labour that flowed into finance) and businesses reliant on external funds (whose financial cake was instead being eaten by the banking system). These are the very businesses that today we are seeking to re-nurture.”

The boom even undermined the banking sector itself:

“At the same time, the ballooning of trading activities was starving basic banking of resources. In consequence, the offering to bank customers became a rather different one. The humble, regional loan officer was pensioned-off, replaced by a centralised credit risk model which neither answered back nor required a pension… Banking became a transactional business, underpinned by a sales-driven, commission-focussed culture.”

Of course, the other reason why booms are bad is that they usually lead to busts. The investment bubbles collapse, but they continue to suck the life out the economy by leaving behind debts that others have to pay for.

And as Mr Haldane reminds us, the combined cost of both the boom and the bust are truly staggering:

“The damage wrought by the pre-crisis debt mountain has been huge and is still rising. The cumulative loss of output relative to trend is already fast approaching one year’s output in the UK. As context, only world wars come with a heftier price tag.”